The good news is the Federal Reserve is finally increasing interest rates to combat rampant inflation. The Fed's Open Market Committee opted to raise the Fed Funds Rate by a quarter of a point earlier this month, with several more rate hikes in the cards through 2024.

The bad news is the inflation these higher rates is meant to curb is already here and probably here to stay. Groceries cost, on average, 8% more than they did a year ago. New cars are 12% more expensive. Gasoline prices are nearly 40% above where they were at this point in 2021. And there's seemingly no end in sight for these soaring costs.

The rising-price backdrop is bad news for most companies and consumers. There are some retailers, however, built to thrive in this very situation. Dollar General (DG -0.64%) is one of them, and it's worth owning simply because inflation is already altering consumers' spending habits.

In the right place with the right price

Dollar General is a discount general merchandise retailer operating as an antithesis to Walmart (WMT -0.98%). The majority of the company's 18,000+ stores are found in towns with a population of less than 20,000, offering mostly basic necessities -- and a few niceties -- within their typical 8,000 square feet of selling space. Custom-sized packaging and lots of private-label goods are a couple of key ways the retailer appeals to this sliver of consumers, who are often at the lower end of the income scale.

And that's about to become a whole lot more important. As CEO Todd Vasos voiced it during the recent fourth-quarter earnings call: 

Once that gas price reaches over $4 a gallon, which it has now, that we normally see the consumers stay closer to home, which bodes very well for that value and convenient message that we have out there for our core consumer.

Vasos added: 

Tougher times for the consumer normally means that she needs us more, and we normally start to see a trade-down once that occurs ... that value and convenience really attract that trade-in, trade-down customer.

Clear spending slowdowns

Other observers are already seeing the impact of what most consumers are feeling now. Consumer research outfit Ipsos found that more than 63% of Americans didn't feel their households could handle any more price increases. For those homes collectively earning less than $50,000 per year, that worry rate ratchets up to 71%.

Of course, prices for pretty much everything have continued to rise in the three months between when the Ipsos survey was completed and now.

A Dollar General storefront.

Image source: Dollar General Corp.

This continuing trend is, in turn, forcing consumers to shift how and where they spend. Based on data collected in January, Morning Consult suggests the average household has already cut back dramatically on discretionary spending in an effort to afford basic household staples like food, rent, and utility payments.

Perhaps the most dramatic evidence that inflation continues to chip away at higher-end, more discretionary consumer spending, however, comes from Jungle Scout's Q1 Consumer Trends Report posted recently. In the report, the market research outfit found that 38% of U.S. consumers are spending less overall, and 72% of U.S. consumers are cutting back on "fun" spending specifically due to inflationary pressures. Spending on goods like toys and games, pet supplies, and tobacco are seeing the biggest year-over-year drop-offs, with toy and game purchases being made by fewer than 70% of shoppers this quarter vs. more than 90% in the same quarter a year earlier.

This perfect storm will pay off

The changing dynamic plays right into the hand that Dollar General is holding even if that won't become evident right away. Retailers are facing wholesale cost inflation of their own. Vasos commented during last week's call that he's looking for a same-store sales decline of 1% to 2% for the quarter currently underway along with an 18% year-over-year dip in per-share profits.

Take a step back, however, and look at the bigger picture. Given that inflation is apt to persist, the company's full-year 2022 guidance for overall sales growth of 10% and same-store sales growth of 2.5% is hardly outrageous. If anything it seems too timid.

Bottom line? Don't be surprised if Dollar General ends up overdelivering in 2022, ultimately making its year-to-date weakness a great buying opportunity.